MMMMMM.......Doughnuts......

I can't stop thinking about Homer Simpson after reading this news story. Palm Beach County has now surpassed one billion dollars in defaulted mortgages during the first six months of 2007. That is insane. Currently, for every one property sold, there are two entering foreclosure.

The problem? Everyone that pretty much wanted a home, bought a home-sometimes 2, or 5, 0r 70. Yes 70. It's just like doughnuts. We call can eat one, maybe two if they are the good ones. How many can you eat before you get sick?

Now that the housing bubble has popped, houses are sitting like stale doughnuts. The problem is, no one is telling the builders to stop making them, and with almost a four year current supply, I have a feeling that these "doughnuts" are going to get old, moldy, and half price.

Read on and find out.

"Michael Sichenzia has a problem. The former mortgage whiz who spent time in New York state's prison for mortgage fraud knows that bad home loans claimed some victims and fattened bank accounts for others.

But telling them apart isn't easy. "The thing we have the most difficulty doing nowadays is figuring out who has legitimately been taken advantage of, as opposed to who went into the transaction with their eyes open," says Mr. Sichenzia, now lead investigator for the Deerfield Beach law firm of Glinn Somera & Silva, which handles foreclosure cases.

That's because so many had something to gain from the mortgage bubble, says Bill Davis, president of Private Funding Specialists and past president of the Florida Association of Mortgage Brokers' Palm Beach County region - and many of those people went about their business winking and nodding. "It's everybody," he says. "The Federal Reserve participated, the big lenders played a part, the credit ratings agencies had a part, so did hedge funds and borrowers, appraisers."

"I had a guy who called me who owns 70 homes," says Stuart broker Michael Morgan. "I know a lady who owns 16. It's the room of 1,000 doughnuts. How many can you eat? Two? Three? Well, how many houses can you live in?"

Dozens of local borrowers now in default loaded up on risk by taking out two mortgages simultaneously: one for 80 percent of the home price and another for the remaining 20 percent. Fifty-eight of those piggy-back loans imploded within four months."

Did anyone notice the recent slew of announcements by several major banks and lenders about the deterioration of their loan portfolios? Even non financial sector companies in manufacturing and retail have publicly disclosed the housing crash is affecting their business, and the it is not contained. The ABX index and the dollar continue to make daily lows. The bottom line is that America has eaten its fill of housing and is now on a crash diet. I cannot imagine how someone is allowed to purchase 16 properties, much less 70. I do know of many, many would be real estate moguls that purchased a second or third 'investment' property without a clue as to cash flow, price to rent or price to income, etc. They simply got greedy and wanted to make a quick buck.

Finally, I thought it was curiously funny that if there is a correlation, the Krispy Kreme doughnuts stock chart going back three years ( KKD) paints a gloomy picture for housing prices.

South Florida Fire Sale....

First, I know it's been a while since my last post. The reason? I grew tired of being the only sane person in South Florida telling people that the housing market was a time bomb, and that the resulting explosion would be long, hard, ugly, and very painful.

For those of you not native or residing in South Florida, it is ground zero for the national Housing Bubble. Almost every aspect of the economy is somehow tied to it. There are more Realtors, mortgage brokers, appraisers, bankers, lenders, construction, roofing, inspection, lawyers, and other real estate dependent jobs than just about anything except doctors or stockbrokers. ( Which could fill an entire blog of its own with horror stories.) For more than two years, I have been reporting of the insanity that took place here and how crazy prices and people had become here. Yet, no one listened. People laughed. They ridiculed people like myself, and other Floridians like Mike Morgan and a fellow over in Tampa that started a similar blog in 2006. Now, some two years later, the laughter has been replaced with reports of decade low housing starts, record foreclosures, three year inventories, the first national price declines since the Great Depression, and on and on. I watched while out of state retirees bought houses sight unseen with their life savings as an investment, where teachers, firefighters, nurses, policeman, and other good people have been forced to move out of the area because house prices were artificially driven sky high by flippers and speculators, where entire neighborhoods are ruined by half empty houses and uncut lawns and squatters, where corrupt individuals and government officials profited off of scamming poor people into bad loans and over appraised houses, and how people that can't scrape two dimes together bought millions in real estate, only to have their properties go to foreclosure.

So, after months of this lunacy, I have a few months to catch up. Please indulge me for a few moments as I comment.

The current state of affairs in the Real Estate market is no less than abysmal, and make no bones about it, going to get worse. WHY?

Simple, really. There is too much supply and too little demand. There are no more greater fools left. Builders are dumping their existing inventory at fire sale prices, trying to mitigate their losses to stay alive. FB's that either were to foolish or greedy and are now upside down are walking away from their houses in record numbers. Over 160 lenders have gone belly up in less than a year. The Federal Reserve, after causing the stock market bubble of 2000, and the housing bubble of 2002-2005, has set in place the mother of all time bombs in another attempt to bail out their Wall Street buddies. The recent 50 basis point cut in rates will do nothing to save the housing market. In fact, mortgage rates are higher now than before the cut. What the Fed did was to ignite an inflation spiral. The dollar has sunk to record lows against most major currencies, ( I mean the flippin Canadian dollar is higher than the US dollar-the first time in 30 years!)and has dumped billions more into the system to bail out the likes of Morgan Stanley, Countrywide, Goldman Sachs, and to get the US taxpayer to be on the hook for the billions in shady loans these people sold and made millions on. This also has triggered gold, silver, oil, and a number of commodities to record high prices. Like I said, we are looking at an upcoming period of hyper inflation.

Back to the main point folks, and it's very easy to understand. There is no more funny money to be loaned. Gone are the neg ams, the 2/28's. the 3/27's, the no docs, the Alt-A's, gone are LIAR LOANS. Gone are the flippers, the speculators, the 2nd,3rd, or 4th investment property buyers. We are back to the days of 20% down and full doc loans.

Want to see where we are heading?

Take a look at this graph from the NY Times:

It doesn't take a Harvard graduate to figure it out. You don't go up over 100% in price and only go down 15% and then proclaim we have "hit bottom." Remember your statistics class? Reversion to the mean? Folks, if this bubble were a baseball game we just finished signing the national anthem. We have nine, long innings of pain ahead. No, make that a double header. It is inconceivable not to believe that a 5-7 year run up where prices have gone up to record levels will not take an equal amount of time and decline in prices to complete the cycle. Furthermore, just like prices overshot to excess on the upside, they most likely will overshoot to the downside before eventually bottoming out. When will that happen? Ah , yes, that is the $64,000 question. The fact is, no one really knows, but my guess is somewhere around 2009-2010 when prices go back to around 1999-2000 prices. About 2-3 x median income. Back to 120 x rent.


Ok, so that is pure theory, right? Well, ever hear of the futures market? Only a few trillion dollars. Now, earlier this week, the Chicago Mercantile Exchange (CME) extended the futures market on the S&P Case-Shiller Home Prices Indexes from one to five years. Now, futures investors can make bets on where home prices will be as far out as 2011. Anyone want to take a guess where the futures are placing millions of dollars as to the direction of housing prices for 10 major metropolitan cities? ( No peeking now...)



Ok, you looked already. This is not pretty. Miami is looking at another 8% loss next year, and a 25% haircut in the next 4 years. In my opinion, that is being kind. Factoring in the new hyper inflation of at least 3-5% per year, condo owners, hotel conversions, half occupied developments, and over supply will shave some 50% in inflation adjusted prices off some neighborhoods. Yes, I said 50%. You heard it hear first.

Don't believe me? Take a drive to Miami and see all of the unfinished condos. Travel to West Palm Beach and marvel at the numerous abandoned condo projects. Think these builders like Lennar, WCI, Toll, Centex, etc. are going to stop building and adding to the already bloated supply of inventory? Not a chance. They are like sharks that either swim or die- they either keep building or go bankrupt.

Finally, I present you with the last chart courtesy of Robert Lacoursiere, an analyst with Bank of America, outlining the oncoming onslaught of ARM resets. Remember those good ole 1% teaser ARM's of 2004-2006? They are due to reset over the next year or so at significantly HIGHER rates. Over the next year, there is at least 30 billion dollars a month in resets, the vast majority in subprime loans. Some estimates are that about half of these subprime homeowners will lose their homes to foreclosure. Most of these ARM's are tied to LIBOR, which is much higher than the prime. One report I read a few weeks back told of some 15% delinquency rates on current subprime loans at one major lender.


So there you have it people. The party is over and the punch bowl has been taken away. We are left with the hangover and the cleanup that always follows an excessive binge. As I predicted, house prices have fallen and will continue to fall for some time. If you own a house and need to sell, price it aggressively. If you are thinking of buying, please be careful and do your own research. Unless you find an incredible bargain, and I mean incredible, you might consider waiting and renting for a while. Use the rent vs. buy calculator on this site. Visit the links I have and research, research, research. A house is the biggest purchase of your life in most cases. You cannot afford to screw up. In my opinion we are far, very far, away from a bottom. Put the numbers on paper and see if it makes sense for you. In the meantime, take care and I will try to post more frequently.

As always, nothing on this blog is to be construed as financial, legal, or any other kind of professional advice. You are all adults and need to base your decisions on your own. Consult your own attorney, accountant, financial advisor, priest, rabbi, or spouse before making any major purchase- especially your spouse!

TICK TOCK TICK TOCK.......

Now that the bursting of the Real Estate bubble cannot be denied by the NAR and the rest of the cheerleading REIC, what is in store for South Florida's FB's?


As reported in today's Sun-Sentinel , it's not good. For regular readers of this blog, you have known about this for over a year. Now that everyone is running for the lifeboats, who will be left to rearrange the deck chairs?



"A deluge of South Floridians are falling behind on their monthly house payments, raising fears that many of the delinquent property owners will lose their homes to foreclosure this year and next."Who knows how bad it's going to get," said Richard French, a manager with SunTrust Mortgage and president of the Broward County chapter of the Mortgage Bankers Association. "It's a little scary to think about."



"Escalating home values from 2000 to 2005 caused buyers to overextend themselves. Many took out short-term, adjustable-rate mortgages and are seeing their loan payments spike as interest rates rise. Higher property taxes and insurance premiums also are putting homeowners in peril."



"Broward had 1,168 property owners with late payments in March, a 331 percent increase over the 271 a year ago, according to Realestat.com, a Plantation-based firm that compiles local housing statistics. Palm Beach County's late payments climbed 288 percent, to 888, from 229 last March.Late home loan payments in both counties increased in each of the first three months of 2007. "



"The rise "bodes ill for actual foreclosures down the road," said Mike Larson, an analyst with Weiss Research in Jupiter.Marc Thomashaw, a vice president for Realestat.com, was more blunt."We're set for an explosion [of foreclosures] to happen between now and the next six months," he said Monday."



" Foreclosures in Broward and Palm Beach counties also rose in March, but at a smaller rate than late payments compared with a year ago, according to Realestat.com.Broward's foreclosures hit 543 last month, more than double the 247 from last March. Palm Beach County had 205 foreclosures last month, up 19 percent from 173 a year ago.Nationwide, the number of homes entering foreclosure in the January-March period doubled from a year earlier, according to California-based Foreclosures.com."


'In recent years, some of those owners avoided foreclosure by refinancing or simply selling the homes, making large profits.But refinancing isn't as easy because lenders are tightening credit standards....What's more, South Florida's slumping real estate market is holding down prices and preventing recent buyers from selling quickly to get out of financial trouble."


"Mark Zandi, chief economist with Moody's Economy.com, a West Chester, Pa., research firm, agrees that short-term investors and others who bought within the past few years are most at risk of losing their homes. Still, he said more mortgage delinquencies and foreclosures are inevitable due to a "noxious mix" of aggressive lending, falling home prices and borrowers facing large increases in their monthly payments."



It's obvious in my opninion we are in the beginning of a major correction in prices. People like Ken Heebner, Bill Gross, Sir John Templeton, and other highly respected individuals are calling for a major pullback in prices. I encourage readers to use the tools on this site. Look at the inventory numbers, track teh number of foreclosures, use the rent vs. buy calculator on this site. Plug in the numbers. Do the math. I believe prices need to come down some 20-30% or wages need to go up some the same to reach equilibrium. Which do you think is most ikely?




As always, the opinions expressed by myself and the readers are just that- opinions. You should always seek out the advice of professionals when making a major purchase decision such as an attorney, CPA, finacial advisor, etc. Please do your own research and due diligence.

Of Bubbles and Space Travel...

The mantra for the last three years in South Florida, was that you could keep building and building, and that the supply would be feverishly bought up. To boldly go where no builders have gone before!! Never mind that according to some real estate cheerleaders there was in fact no more land to build on in the first place, or that the supply to demand ratios were in nose bleed territory. Buyers lined up to wait for hours, sometimes months in advance of new developments breaking ground for the chance to purchase a property. You couldn't lose! Errr..right?

Like the episode in Star Trek where the crew of the Enterprise were transported with their alter egos , builders are suddenly thrust into the mirrored dimension of the unthinkable- too many houses and too few buyers. Beam me up Scotty!!

As reported in the Palm Beach Post , builders (which like sharks die if they stop moving) have....gasp... stopped building houses. Captain!! She's breaking up!!!

"Free markets supply a bitter antidote to the problem of too many unsold houses, and last year, home builders in Palm Beach County and the Treasure Coast took the cure.

They stopped building."


The dollar value of new residential construction plans in Palm Beach, Broward and Miami-Dade Counties dropped by 24 percent in 2006, according to fresh-off-the-press numbers from McGraw Hill Construction. The dollar value of new home permits even in home building hot spots like St. Lucie County fell by 33 percent - and St. Lucie is considered one of the fastest-growing areas in the country.


It also gives home builders time to lick their wounds. Tuesday morning, WCI Communities Inc. reported cancellations outnumbered new orders in Florida. D.R. Horton Inc. reported a 64 percent drop in first-quarter earnings. "

Presently, there is about a published four year supply of South Florida of properties. That doesn't include FSBO's, REO's, or properties that are being pulled and relisted on the MLS. The builders need to work through their remaining unsold inventory, and are dropping prices like bombs across the country. This is doing two things- first, it is killing the private sellers that cannot compete with the huge price incentives, and second, it is driving the comps down. It is a viscous spiral downward that will continue until they bleed of their inventory, which is going to take some time. These builders are writing down the land they own at massive losses. They are reporting more cancellations than closings. They need to sell and sell NOW. Warp speed Mr. Sulu!!

Not to sound smug, but it's not as if you weren't warned on this blog and many others over the past year that like all bubbles, they eventually pop. And when the bubbles disappear, your exposed to the world.

OK..OK..I Can't Resist....CASEY SERIN

For those of you that are not familiar with Casey Serin , he is the now infamous poster boy for the current bubble.

By his own admission, "I'm a 24 yr old real estate investor from Sacramento CA. After going to a few seminars I bought 8 houses in 8 months in 4 states with no money down looking to fix 'n flip. I made some mistakes and fell flat on my face with millions in debt and facing foreclosure. Trying to avoid foreclosure, sell quickly, repay everyone, and blog my lessons to help others in trouble."

What he really did is by questionable means, ( some say fraud), used "liar loans", 0 % percent & cash back at closing financing, pumped up appraisals, and more dubious methods to purchase 8 houses in less than a year. Fast forward to 2007 and you know where this is going. Foreclosures, judgments, and possible jail time are all on his plate.

I have refrained from "officially" joining his circus, as it is not directly related to South Florida. However, I decided to change my mind for two reasons.

First, specu-vestors like Casey are part of the reason WHY prices got so crazy. You had naive wannabe millonares with visions of being the next Donald Trump buying multiple properties all across the country. Many of them used "liar loans", and phony appraisals. I have seen my fair share of "cash back at closing!" offers in the newspapers, Craiglist, and Ebay for local properties. One study said as many as 50% of more of purchases in the last two years in South Florida were by investors, NOT owner-occupiers.

Second, although Casey professes to want to 'come clean', and 'pay back every dirty cent', he is quite evasive in providing details, taking or answering advice, and he has resorted to editing and deleting comments that are in contrast to his "spinning." It is my opinion that his blog was primarily to generate Adsense revenue, and when his account was revoked for fraud, the blog is no longer important to him as it can't be used for his benefit.

So, I decided to provide a forum for readers to comment about Casey, unedited. Just keep it clean. No profanity or inappropriate stuff. Hopefully, we can get some clarity and have some fun.

South Florida Foreclosures On The Rise

While the Real Estate Industrial Complex or (REIC as it is known in the blog community) continues to spend millions on adverstisements spouting it is "time to buy", the endless stream of data continues to come out showing how the bubble has burst. Whether you are a seller or prospective buyer, it is apparent you cannot simply continue to blindly follow the NAR and ignore the facts. People are losing their houses at an alarming rate.

As reported here MSN Real Estate, "Foreclosures nationwide were up 43% from a year ago in the third quarter of 2006. Foreclosures are rising in many parts of the country, fueled by a slowdown in home sales, slumping real-estate prices and rising payments on adjustable-rate mortgages. Homeowners who have lost a job or faced another economic crisis are finding it hard to refinance or take out home-equity lines of credit to bail themselves out, analysts say."


But wait folks, it gets worse. "The Detroit, Fort Lauderdale, Fla., and Denver areas posted the nation's three highest foreclosure rates for the third quarter of 2006, replacing Indianapolis, Atlanta and Dallas, which had been the top three markets for the two previous quarters."

"Among the top 20 metro areas on the list, two pricey Florida markets posted the biggest jumps for the quarter: Fort Lauderdale and Miami saw 87% and 97% jumps, respectively, in the number of foreclosures as investors failed to cash in on speculative buys."

Ft. Lauderdale has the distinction of ranking #2 in the nation with foreclosures, just behind Detroit, Michigan, with 8,431 foreclosures reported in the third quarter of 2006. That equals 1 out of every 88 households, or over FOUR times the national average. This is a mind numbing 86.53 % increase over the second quarter of 2006. We are talking only three months.

For those of you living in Dade County (Miami), you are fortunate enough to be #4 in the USA, with 9,380 foreclosures in Q3 2006,or 1 out of 91 households. This was just shy of 4 times the national average, but an even higher 97.18 % increase over Q2 of 2006. Yes, a double in one quarter.

Palm Beach County joined the party at lucky #13. Congratulations! With 3.643 foreclosures in Q3 2006, it equates to 1 in 153, or only 2.53 times the national average. If you want to put some positive spin on the numbers, this is a mere 37.89 % increase in one quarter over Q2 2006.

The time for being an ostrich is over. If you are a seller, I suggest you adopt an aggressive campaign to sell your property,including major price reductions to sell it fast. If you are a buyer, use one the many available buy vs. rent calculators. The numbers remain so far nutty to buy, I cannot endorse buying. In my opinion, 2007 is going to be far worse than 2006. Like a boulder rolling downhill, this decline is building momentum and is far from reaching the bottom. By every statistical and historical date I have seen, prices remain tremendously overvalued.

As always, nothing on this blog is intended as legal or financial advice. Do you own due diligence and consult professionals such as your attorney, accountant or financial advisor regarding your personal situation and needs. That being said, in my opinion it won't be until 2008- 2009 before we see the bottom of this decline, which will be much further downward in prices. Remember, asking a Realtor if it is time to buy is like asking a barber if you need a haircut.

Happy New Year and may 2007 be a good one for everyone.

Five to One Baby, One in Five, No One Here Gets Out Alive,

Yes, I am dating myself quoting a thirty year old Doors song, but it seemed fitting given the latest news that a whopping 20% ( one in five) of subprime loans made in the last two years may face foreclosure. That is HUGE.

According to the New York Times "about one in five subprime mortgages made in the last two years are likely to go into foreclosure, according to a report released yesterday, ending the dream of homeownership for millions of Americans...The report offers a somber assessment of loans that had helped millions of Americans with blemished credit attain homeownership. About 2.2 million borrowers who took subprime loans from 1998 to 2006 are likely to lose their homes."

"The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody’s Economy.com. Researchers examined more than six million mortgages made from 1998 until the third quarter of 2006; the report is the first nationwide study on the performance of subprime mortgages. It includes projected foreclosure data for all major metropolitan statistical areas. The highest default rates are expected to be in cities in California, Nevada, Michigan and New Jersey as well as Washington, D.C."

Furthermore, "The foreclosures will cost those homeowners an estimated $74.6 billion, primarily in equity."

And, "The center suggests that risky lending practices could lead to the worst foreclosure crisis in the modern mortgage market. "

As we finish with 2006, 2007 will be a watershed year which will decide whether we are in a correction or a full out crash. If studies like this are any indication, it is going to be a very rough year for overleveraged borrowers.